Right Thinking from the Left Coast

Tag: Retirement

We are getting old. There is simply no way to sugarcoat that. Our country is getting older and the ratio of seniors to workers is increasing. In fact, last year, our childbirth rate edged below replacement level.

I state that at the beginning of the post because that reality seems to escape every pundit who wants to talk about Social Security. They seem to think there is some crazy scheme that will alter the reality that we will have too many seniors drawing on too few workers in our future. No matter how retirement is handled, this is going to have an impact. It’s going to mean slower growth in the stock market, slower growth in investments and less relative revenue for government retirement plans.

This is reality.

We are also not saving enough for retirement. The WaPo claimed that the average 401K had $30,000; Fidelity claims $77,000 on average with $143,000 for over-55’s. That not enough to sustain retirement for almost anyone. Savings rates were approaching zero before the recession and are still in low single digits.

This is also reality.

Bizarrely, the response to this reality and the President’s new offer to use chained CPI to keep Social Security under (some) control is — I shit you not — a proposal to expand Social Security.

The major proposal in the report is to add a brand new benefit to Social Security, called Part B, which would provide a flat $11,699 per year to all retired workers. This would come on top of regular Social Security, which would also be protected from any further cuts [in 401k or defined benefit plans].

The net effect is that the new Social Security program would replace a far bigger chunk of a worker’s lifetime earnings than the current program does

…

So how much would this cost in taxes? Quite a bit. At the moment, Social Security is expected to experience a funding shortfall by 2033. Congress will need to raise taxes by between 1 and 1.5 percent of GDP just to maintain current benefits. On top of that, the expanded benefits proposed by New America would cost an estimated 3.7 percent of GDP. The net cost: About 5 percent of GDP.

Only an idiot would ignore that Social Security is already running a primary deficit and its “solvency” through 2033 comes from a trust fund that consists of nothing but IOU’s. Only an idiot would ignore the problem that massive retirement guarantees have created in Europe — plunging fertility rates, slow growth, waves of early retirement, even less personal savings. And only the heir to the throne of the kingdom of idiots would propose tripling this problem.

Even if you ignore the political aspects, you’re talking about a massive tax hike which the government will, as it has done with Social Security, loan to itself and spend, leaving us in an even worse situation. Instead of having a Social Security Trust fund with $5 trillion fictitious dollars in it, we’ll have one with $10 trillion. I haven’t seen a proposal this stupid since Algore said he would shore up Social Security with the money we were borrowing from it.

Now this is supposed to be the part of the post where I endorse privatizing social security. And I used to support that idea. However, I’ve moved away from favoring that for several reasons.

First, the projections that privatizing Social Security will lead to better retirement benefits are based on, in my opinion, very optimistic predictions of what the stock market will do for the next century. Yes, the residents of Galveston have done well with a privatized system. The United States is not Galveston. Small programs never scale up like that and the growth rate we would need to sustain Galveston level returns would eclipse anything we have experience in the last five decades. As I said at the beginning, we are getting old. That’s going to slow our growth everywhere. Privatizing might gain you a little bit but it will not magically generate trillions in wealth.

Second, I think privatization misses the point of Social Security. It’s not supposed to be a retirement system; it’s supposed to be a safety net. It’s supposed to make sure that seniors do not end up poor simply because they are too old to work. Indeed, this is one of the reasons I support cutting it back. Private investments can never be safety net. There is intrinsic risk in investment that can never be removed. If even a small fraction of seniors lose money, how long will it take for Congress to make good their losses? Ten seconds? You may remember Congress’s instafold a few years ago when the seniors screamed because they were not getting a cost-of-living increase in Social Security (for the simple reason that the cost of living was not increasing). It will be the bank bailout all over again — private gains and socialized losses.

(And frankly there are a vast number of investment agencies and consultants that prey on seniors and gobble their money in investment fees. I’ve been helping retired relatives fight off these jackals for years. It’s disgraceful.)

But the biggest reason I opposed privatization is that it simply gives too much power to the government. If anyone seriously believes that the government will allow Social Security funds to be invested without putting some controls on them, I have a bridge to sell them. It will be only a matter of time until investments are restricted to “buy American” or companies are debarred from getting Social Security money unless they have enough women on the board.

So I’m moved away from privatization … of Social Security. But I still think that private retirement accounts — IRA’s, 401k’s, 403b’s — are the way we should be going. We simply can not afford a massive guaranteed federal retirement system, even if such a thing were a good idea.

Look, I’m willing to acknowledge the research that 401k’s have not goosed the savings rate as it was hoped they would (although the liberal claim that his costs the government money is ridiculous since 401k’s are taxed when they are cashed out). Maybe we should go with the idea of making them “opt out” instead of “opt in”. Maybe we should make them mandatory for businesses that contract with government. Maybe we have to improve the incentives. I don’t know.

But private retirement accounts are more of answer than further socialization. We are getting old. But we are not the first country to do so. Europe has gotten older faster and their guaranteed retirement systems have been a debacle. Do we really want to imitate their bad example?

Making due with less, that is the new reality. Governmental agencies, from the little municipalities and townships all the way up to Washington, have adopted the mantra of austerity, for the simple fact that there are not enough dollars coming in to pay for obligations going out. And one of the biggest drags on maintaining fiscal solvency is paying and perking its public employees.

Atlanta’s City Council is expected to vote as early as Thursday on one of the most sweeping overhauls of public-employee retirement benefits attempted by a large U.S. city in recent years, as cities and states across the country race to close big budget gaps.

The legislation, if passed, would set the stage for eventually eliminating the city’s current pension system entirely. That would shore up its budget and potentially bolster similar efforts by other municipal governments. Many pension changes undertaken by other cities have focused largely on asking public employees to kick in greater contributions to their retirement funds or reconfiguring benefits.

Faced with a $1.5 billion shortfall in benefit payments owed to current and retired employees, Atlanta Mayor Kasim Reed is backing legislation to phase out pensions, which offer defined benefits, and replace them with a 401(k)-type plan, in which the city instead pays defined contributions. The new plan would also have city employees join Social Security for the first time.

For the purposes of full disclosure it should be noted that I receive a pension from the state of California, it is not what you would consider obscene, I left way before it entered that realm because I valued my time over that of a bigger payoff.

Some background is in order. It use to be that working for the government, being a civil service employee was an attractive position, not for the pay which was always meager but for the benefits. And probably the biggest benefit was the ability to secure a pension after a prescribed amount of years of service. It first originated in the military but later spread to other civil service positions. If it is not already obvious, the beauty of getting a pension is that you never had to worry about it’s vitality and health, when you retired it would be there for you.

But in the last 20 years or so, unions have upped the ante. They manipulated the formulas through their collective bargaining powers and put and even bigger drag on the municipality for pension maintenance. This can be done in a number of ways. Specific contributions can be massaged, how much if anything the employee contributes. The formulas can also be jiggered. When Arnold was running for governor here in California, the incumbent, Gray Davis, was in a pickle and was willing to bargain with union bosses for their support in the upcoming election. He gave my agency a new pension formula, 3% at 50 (meaning that for every year of service the employee would get 3% of his highest one year salary, so he did 30 years then he would be guaranteed 90% of his salary for life). This was absolutely unheard of at the time (we were the only one in the nation that had this, over the years other agencies in other states have duplicated this coupe) but desperate times called for desperate measures and he gave up the farm for a little security, which ultimately did not help him anyway.

Atlanta is trying to move all new employees over to a 401K plan, meaning that the employee can deduct a certain amount out of his paycheck each month tax free into a retirement account, that account which would be managed by the employee, he would have to decide asset allocation, stocks, bonds, treasuries, or money market funds. The employee would also be placed into the social security system, paying FICA taxes each month as well. With a 401K plan (unknown at this time whether Atlanta would provide matching funds, doubtful) the ultimate payoff depends on how well the money was invested, nothing would be guaranteed.

The unions are spitting mad over this:

The highest-profile fight came in Wisconsin, where Republican Gov. Scott Walker signed a law forcing public employees to contribute 5.8% of their salaries to their pensions and pay at least 12.6% of their health care premiums. They will have reduced ability to bargain for wages.

On Monday in Florida, the state’s 140,000-member teachers union filed suit against Gov. Rick Scott, also a Republican, to block a law requiring public employees to contribute 3% of their salaries to their retirement plans.

This is what I mean when I described past manipulations. Through collective bargaining the percentages the employee had to pay into both his pension and medical insurance has become smaller and smaller to the point where many don’t pay anything, totally ridiculous. So now, when asked to pay something, they scream like stuck pigs.

Realizing the folly and insolvency of the program years ago, I planned my finances so that if the state went bankrupt tomorrow and I was told that my pension was no longer viable, I would still be fine. I knew it would not be around forever, it couldn’t, that is the reality. Another reality is that the whole idea of pensions has to be rethought. I would expect those in the military to be left alone, they deserve every penny they get, but for everyone else? Pensions are a thing of the past, unless formulas can be worked out so that employee contributions alone (no state obligations) can make them work. If the unions don’t want their precious pensions taken away then they better stop their yammering about the unfairness of them having to pay pennies on the dollar for their future welfare.

Sorry to hit you with two egghead posts in one day, but there’s a lot of bullshit out there needing to be countered.

The Liberal Echosphere has erupted in response to Alan Simpson’s suggestion that we raise the retirement age. They point out that the rise in lifespan is mainly due to drops in infant and child mortality. The number of years one can expect at age 65 has risen much more modestly.

A man who turned 65 in 2010 has a life expectancy of 83.1 — barely five years more than he had in 1940. Women have increased their life expectancy at roughly the same rate. Since 1940, the retirement age for drawing Social Security benefits has been lifted from 65 to 67, meaning that people are receiving a net of only three extra years of benefits than they were 70 years ago.

First of all, three years of benefits multiplied by millions of seniors is a lot. It’s at least 20% of the Social Security bill.

But second, this ignores something more important. In 1940, far more seniors were poor and disabled then are today. If you got to 65, you were not in good shape. Over a third of seniors were living in poverty and at least that many were disabled. Those numbers are dramatically lower today. In fact, seniors are the wealthiest demographic by age.

The solutions seems quite simple to me (assuming that privatization is off the table):

First, Social Security pays out larger benefits to those who delay retirement. That slope should be made longer and steeper, especially in the early years. Seniors who can’t work shouldn’t be in poverty. But there should be greater benefits to delaying retirement. I would even extend this to dramatically improved survivor benefits for those who never retire.

Second, the program should be means-tested. No one should be cut off having paid into the system. But benefits should be tapered with the principal goal being keeping seniors out of poverty.

Or, we can stick with option three — the one preferred by the Left. We can stick our heads in the sand and pretend the problem doesn’t exist.